Income Inequality, As Seen From Two Angles

Economic inequality was a key theme of the president's State of the Union address. Clearly, it's a subject that he is determined to get the country talking about and talking about in a different way; more broadening of opportunity, less talk of raising taxes on the rich. Here's part of what he said last night.

PRESIDENT BARACK OBAMA: Today, after four years of economic growth, corporate profits and stock prices have rarely been higher and those at the top have never done better, but average wages have barely budged. Inequality has deepened. Upward mobility has stalled.

SIEGEL: Well, joining us now are two economists with very different approaches to economic problems. Paul Krugman is liberal, a columnist for the New York Times and a professor of economics and international affairs at Princeton University. Welcome to the program.

PAUL KRUGMAN: Hi there.

SIEGEL: And Douglas Holtz-Eakin is president of the American Action Forum, which he describes as a center-right policy institute. Holtz-Eakin is former chief economist of the president's Council of Economic Advisors under President George W. Bush. Good to see you again.

DOUG HOLTZ-EAKIN: Thanks for having me.

SIEGEL: Let's start with the facts here. And Paul Krugman, let's begin. Has inequality in America, whether over the past four years as the president said or over a longer period, has it deepened and didn't a Harvard study just say that social mobility, in fact, hasn't changed all that much?

KRUGMAN: Those are different questions. So they basically - the Harvard study said that your chance of moving from, you know, middle class to upper middle class or whatever hasn't changed, at least as far as I can tell, statistically, significantly. But the gap between those classes has widened enormously. I just had my favorite statistic of this morning. The top 40 hedge fund managers in America earned as much as 300,000 schoolteachers in 2012. So that gives you an idea of how unequal a society we've become.

SIEGEL: Doug Holtz-Eakin, do you agree with that description of what's happened to the economy and wealth?

HOLTZ-EAKIN: Yeah. The facts, I think, are pretty clear now and one of the things that I thought was nice about the president's remarks last night is he took the time to point out that this has been going on for decades. You know, three decades at least and these are deep economic forces that are driving the widening wage gaps.

SIEGEL: So we have some agreement on what the facts are, to begin with.

KRUGMAN: Yeah, which actually, by the way, I mean, the substantial part of Washington does not agree on these facts so I'm glad that Doug and I are - we're in the same universe of reality. That's good to note.

SIEGEL: But to what degree is economic equality desirable? I think most of us would like to feel that people who work harder should make more than people who don't work hard, and education is virtually marketed as an increase-your-wealth scheme in our country, that you should be rewarded more for acquiring very useful skills. To what extent should there be some degree of economic inequality?

KRUGMAN: Well, for sure, there are no Cuban Communists in American political life, right? Nobody thinks that we should be a society without monetary incentives. No one thinks that we should have exact equality or even anything close to that. The point, however, is that our notion of what kind of society we should be, I think, is something like the kind of society we actually were 30, 40 years ago where we had a broad middleclass, where the gap between people at the top and the average or the median American was not that large.

When it gets this extreme, a couple things happen. There's a disconnect. You know, we've had several decades when productivity of workers had been rising, but the wages of the typical worker really barely have. We have a feeling that socially we're ceasing to be an integrated society. This is not the kind of country we want to be and so it is a problem when inequality gets to this extreme.

SIEGEL: Well, Doug Holtz-Eakin, one solution, raise marginal tax rates sharply so that people, at some point, start giving back into the public domain and money is redistributed.

HOLTZ-EAKIN: I don't think that's going to be the answer. I mean, we already have the wealthy paying the vast majority of the taxes and you could raise marginal taxes more, but at some point, you have to recognize that the forces dwarf any of these tiny policies, for instance, like tax rates or minimum wages and go back to what the president was actually quite careful about in the speech he gave a while back on - when he defined this as the compelling issue of our time.

He talked about opportunity and social mobility and not just inequality. And I think that's the key. We know that the dividing line between being poor and non-poor in the United States is having a job. We've had poor job performance recently. And we also know that the dividing line between success in the labor market once you have a job and less success is skills and education. We need to really focus on and get serious about that, not just talk about it.

SIEGEL: What about that, Paul? What about all this focus on the bottom of the scale and not so much at the top?

KRUGMAN: No, I think both matter. There is still a substantial amount of money at the top and you don't want to punish the rich. But there is money there and it can be used to help people in need. It can be used for a stronger social safety net. And I will say I think Doug is exactly wrong here, about saying that taxes and government policies that do some, you know, shuffling of income around can't make a big difference. On the contrary, the one thing that we actually know works to limit inequality is exactly taxing and strengthening the social safety net.

SIEGEL: Doug Holtz-Eakin?

HOLTZ-EAKIN: Well, I think it has worked in the U.S., and one of the frustrations I think many people who look at these data carefully suffer from is that the usual measures of poverty exclude most of the social safety net. They don't count the transfers that we give to the low-income Americans to try to support them in their need. And so, if you look at more broad measures of income that include food stamps and the kinds of support programs we have, you don't get near the same pictures you do by just looking at money income earned in markets.

And so, our safety net does need to be strengthened because it's under a huge financial stress: Medicaid, Medicare, Social Security, all have financial problems that need to be fixed. But it's not that it's failed to address the problem.

SIEGEL: Just like to hear from both of you what you make of the current level of discussion in Washington about income or wealth inequality, whichever. Paul Ryan, the vice presidential candidate last time out, gave a speech about it. There seems to be some consensus now that this is a problem - some degree of consensus. On the other hand, the solutions are the same solutions that we've heard in the past.

The Democratic solutions tend to be to support social programs more and Republican solution is to cut taxes and have people create more jobs. What do you make of this discussion, Paul Krugman first?

KRUGMAN: Oh, it's a pretty pathetic discussion. Objectively, Paul Ryan's policies are anti-poor. His policies are all about slashing the social safety net and cutting taxes on the rich. But he's decided, I think this is maybe significant, that his rhetoric has to be: But I really care about the poor and this is going to help them.

Democrats I think are actually - they're saying the kinds of things Democrats have already said but they're actually saying them with a little bit more conviction now. In some ways, Democrats have recaptured their mojo. They're no longer ashamed of standing up for New Deal-type liberalism.

SIEGEL: Doug Holtz-Eakin, what do you make of the discourse over this?

HOLTZ-EAKIN: I think the most significant change is the agreement on the facts that opportunity in the United States is not what it once was; that there are significant challenges that have to be addressed. That's no longer a one-party discussion. You're hearing it from both sides.

In terms of policy proposals, I don't think there's been a tremendous (unintelligible) new approach on either side. I, at least, was pleased to hear the president talk last night about expanding the Earned Income Tax Credit to single parents who aren't custodians of children. That's the biggest gap in what has been one of the most successful anti-poverty tools we have.

SIEGEL: This is in effect a negative income tax...

HOLTZ-EAKIN: Yeah, and it's worked.

SIEGEL: ...for people below a certain level get money back.

HOLTZ-EAKIN: It's worked for everyone else quite well. If you want to be serious about tax reform, and you want to be serious about the kinds of things that Republicans want to accomplish, I think that should be in the mix.

KRUGMAN: This is something where you are, in fact, hearing Republicans say some good things about. And this was originally a very bipartisan policy. On the other hand, question: Can we actually do this extension of the EITC to help people who do not have children with new money, or are we just going to rob Peter to pay Paul? Are we going to take away from the people who are now benefiting to give to some other group of people? And that...

SIEGEL: You mean if you cut food stamps in order to increase the Earned Income Tax Credit.

KRUGMAN: Well, or actually even just reallocate, reduce the rates of payment for parents of children. And that's, right now, everything we've really heard from the Republican side is, is basically no new money. And that means that we're not anywhere close to a consensus on what we should actually do.

SIEGEL: Do you think part of what's happened here is that we're seeing the economy recover from the Great Recession and people are saying: Oh my, this is what normal could be and it's not just that we were laid low by the collapse?

HOLTZ-EAKIN: It's not what we call recover. I mean but, you know, if you measure the recovery by corporate profits or measure recovery by GDP or the kinds of things we look at, yeah, there's been a recovery. If you just looked at the labor market there's no recovery.

SIEGEL: We haven't recovered yet.

HOLTZ-EAKIN: We have a smaller fraction of people working today than we did before the recession. It's not a recovery yet. And the pain is real and you're seeing people say this pain has got to be changed. Now there's got to be a debate about how to fix it, but the pain is real.

KRUGMAN: In fact, I think it's almost exactly the opposite. I think what's actually happened is that the social safety net has better support among the general public because more people realize that it might be something that matters for them. In a peculiar way, the persistence of a weak economy has made it more possible to do things that will in the end alleviate inequality.

SIEGEL: Paul Krugman of The New York Times and Princeton and Douglas Holtz-Eakin of the American Action Forum, thanks to both of you.